June 25, 2012

The return of the stock picker

The period from 2008 to 2012 has been a nightmare, right? How could it not be?
The market went from 20500 to around 17000 levels. That’s a loss of 18% in nominal terms, and if one considers an inflation of around 8%, then the loss is a mind numbing 42%. So if one had complete foresight and could see the future, then 100000 invested in a bank deposit would be worth 144000 versus around 82000 in the stock market.
So where is the debate in this?
The time of the stock picker
I know of several fellow investors who have actually done quite well during this period. They may have lost money on a few ideas here and there and suffered through temporary drops during the market swoons in 2008-2009. However over the course of these 4+ years, most of these investors have soundly beaten the market and delivered double digit annual returns
So how have these guys achieved this feat ? Do they have a special diet or drink something special :) ? I don’t think so as far as I know
What has enabled these returns
I would say that there two reasons for the above result. All these investors who have done well, have a long term view of investing and don’t invest with one week or one month in mind. In most cases, they invest after a thorough analysis of the underlying business and only when the market undervalues the business.
A disregard for short term performance, usually results in a long term outperformance.
The second reason I would say is that all these investors are focused and work hard at finding good ideas and then purchasing the stocks, inspite of all the negative news around them.
It helps to be emotionally stable as far as the stock market is concerned. One need not be like Mr Spock from star-trek, but as long as you can avoid extreme greed or fear, you will do fine.
Hard work and focus
This is one of the most under-rated factors in being a successful investor. I am pretty sure most of us were told as young kids, that the way one can be successful in life is by working hard and being diligent about it.
This simple lesson which we apply to almost every other walk of life, is conveniently forgotten by a lot of people, once they enter the stock market. It almost as if, investors collectively expect a Santa Claus to give us returns just for putting up some money in the stock market.
I cannot think of any successful investor who has succeeded without a lot of effort and focus.
Enjoying the process
At the same time effort and focus is not enough to succeed in the long run, if you do not enjoy the process of investing. There are long periods of time when you will not make a meaningful return and all the effort would be seem to be in vain.
I personally went through this phase quite early in my life as an investor. The period 2000-2003 was one mind numbing and grinding bear market when the index went from 6000 levels to 3000 levels over a period of three years. It was no different from what we are experiencing now. Companies like L&T, concor, BHEL sold at 5 times earnings.
The only reason I was able to keep learning and keep going was due my passion for investing. A single digit return on a few lac of rupees is not even minimum wage …why else would any sane person keep working hard for less than minimum wage :)
Everyone can do it
The secret to being a successful investor is that there is no secret at all. Inspite of the nonsense propagated by media, that the common man should leave investing to professionals, I think anyone can become a good investor.
The most important factor to be a good investor is to really enjoy the process of investing. If one loves the process, he or she will find the means to continuously learn and improve as an investor.  The returns usually come in time, if one is patient.
The return of the stock pickers
The period 2003-2008 was a big tidal wave. All one had to do was to point his or her boat in the right direction (real estate or infrastructure ?) and the wave carried you through.
The  investors who have done well in the past few years are most likely the ones who enjoy the process (and ofcourse want to make money too) and are continuously learning and getting better at it. The last 4+ years have been a time of stock picking and hard work. If you looked for good ideas and operated with an independent mind, the results have been quite good.
Let me make prediction – I am close to 100% sure on this. Once the next bull run starts (it looks unlikely , but will happen in time), you will find a lot of new investors who will boast of their investing prowess and will think that making money in the stock market is easy and effortless.


Annapurna Shastri said...

well written.True,that hardwork,diligence and patience is what is reqd. to be a successful investor,but I feel one of the other pre-requisites is a good working knowledge of finance.For person from a non-finance background to start right from the basics and move on to understanding and studying companies,identifying and investing in value ones could take years.! Personally,even after being a finance professional having subscribed to paid research,most of my so called value stock picks in the last couple of years are in the RED:)

Shantanu said...

Well said ... but it is the persistent effort which becomes a little difficult if you also have a job which is different from your passion. I am learning from value investors like you and hope to come to your levels in the course of time.

Thank you for your inspirational posts .... as always.


Anil Kumar Tulsiram said...

I fully agree with you Rohit. The additional challenge is to convince your near and dear one's that what you are doing is not insane and is totally rational. I am on this journey only for few months, where by instead of full time job decided to take independent investment on value principles but found convincing or even getting your near and dear confidence is most challenging.

Reni George said...

Hi Rohit

Nice to see something written on your blog,always makes it a point to read it.Well regarding your last para,i completely agree with you,in the next bull run i will find a lot of investors and analyst boasting about how they have caught the horn of the bull,in the last bull run also i had encountered many of them at one of the office of the brokerage house in vadodara.But right now they have left the market,or if rightly said the market has forced them to resign,and iam still investing where iam finding some value.After the encounters i coined a saying which has become very famous in this broking house.MARKETS REMAIN THE SAME ONLY THE FACES OF THE PEOPLE CHANGE HERE.Still now i cant forget a particular investor or should i say a gambler who made lots of money at the end of 2007 and in 2008 starting i was ridiculed by the person for not investing in RELIANCE POWER IPO,reni bhai daalo paise iska opening hi 800 Rs Hoga....the guy is nowwhere to been seen,last heard from my broking house that the guy lost handsomely,has he had too many leveraged positions and had to ultimately sell his house to pay off.....I did not have had any SCHADENFRUEDE effect,because i felt sad that years of his hard earned money was lost in a matter of couple of months.

Sunil Gupte said...

Good Article...........

Yes , retail investor can make money in stock markets . But how non-finance background investor (even with finance background) avoid companies with accounting gimmicks and fraud ?
If you see companies which are down more than 80-90% from last few years high , only few companies(may be less than 25%) are down because of genuine business reasons. Most of them down now because market is suspecting some manipulation of profit and accounts in these companies. What do you think?

Contra Value Bets said...

Retail investors need not know finance to reap above above average profits in the market.

It is the temperament which is all required for successful investing.

Anyone can learn basics of finance in few years, but to earn (not learn) that temperament, you need to be lots of bear and bull markets and plenty of mistakes.

Luckily I have been reading the annual letters of Buffett every year again and again and again. That will stop to put money here and there.

Believe me guys, all it takes is the correct temperament and nothing else to succeed in the stock market. If you switch your mentality of stocks to business like your farm plot which u will hold for decades.

You need not research new companies every month/quarter. You need not spend 8 hrs a day digging into nitty gritty of the business.

There are plenty of good proven businesses available (atleast 10) in the market. All you need is to wait for the right moment to invest. That moment may come once in five years, but it will surely come.

Four or Five good big investments is enough to make you millionaire.

Views invited.

Rohit Chauhan said...

Hi annapurna
you are right ...one needs knowledge of finance, but frankly speaking that take at best a couple of years to learn
the most difficult aspect to manage the emotions which take a lifetime and not easy to learn.


Rohit Chauhan said...

Hi shantanu
you are right ...the upside is that if you have regular job then there is no pressure to generate the returns. you learn at your pace and invest with much more confidence as you have your job income to fall back on


Rohit Chauhan said...

Hi anil
thats completely true :) ...also if you have a big savings pool you put some part of it in fixed income and let your family know that you will not touch it. that way they will not worry you risking their future :)

i have face the same challenges ...taken a decade to convince myself and others


Rohit Chauhan said...

H reni
thats true ...we get the a crop of people every bull run who think making money is easy. 2000 , 2007-2008 were such times and there will be more in future

unfortunately fear and greed are the the absolute truths of the market


Rohit Chauhan said...

Hi sunil
it is difficult and unfortunately there are no fixed rules. one way to manage this is to avoid companies where you suspect the management.

sometimes discretion is better part of valor. invest only if you are comfortable with the management..in the end you dont need more than 15-20 companies to build a good portfolio


Rohit Chauhan said...

Hi contra value bets

you hit the nail on the head. finance is easy to learn , temprament is very diffcult

there were a lot of people who knew stocks were cheap in early 2009, but were scared to invest.

in the end if you control your greed and fear, half the battle is won

btw, every time i read WEB's letter, you realise the wisdom of what he says even more


Gaurav said...

Hi Rohit,
Very interesting article. However, when we search for good undervalued stocks in times like this, we get loads of data. How to you separate wheat from chaffe then? If you apply a filter (e.g. low debt, low price-to-book), you will come across interesting ideas like in sectors like steel, real estate. Most of these companies are in a cyclical group. There are few companies with extremely attractive prices. But how do you make sure that you pick the right one? After all we all are investing in a downturn with understanding that few of our picks will take a temporary beat and our money has opportunity cost. Our picks may be laggards in future recovery or bull run while other companies may outperform. How to identify the laggards?
Best Regards,